Fed officials flag soft economy but mum on easing

By IBT Staff Reporter On 03/01/12 AT 7:00 PM

Federal Reserve Chairman Ben Bernanke and other top officials of the U.S. central bank on Thursday highlighted risks to the economic recovery despite recent signs of strength, but offered few hints that any additional monetary stimulus might be needed.

Bernanke told lawmakers there was reason to be suspicious of the recent decline in unemployment given the weakness of economic growth.

There's still a bit of a contradiction between the improvement in the labor market and the speed of the overall recovery, Bernanke said in a second day of testimony to Congress. You've still got consumption spending growing relatively weakly.

Two of the Fed's regional presidents, Sandra Pianalto of Cleveland and Dennis Lockhart of Atlanta, also cited the economy's shaky stance, with Pianalto signaling that policy was appropriate for the current environment.

There'd have to be a significant change to my outlook to change my position on policy at this time, she said in rare press briefing.

The Fed had held interest rates near zero since December 2008 and has vowed to maintain ultra-low rates at least through late 2014. The U.S. central bank has also made $2.3 trillion in asset purchases in a bid to drive down rates and stimulate growth. Many financial market observers have been watching closely to see if the Fed will signal a new round of assets purchases, known as quantitative easing.

U.S. gross domestic product grew 3 percent in the fourth quarter, but data on Thursday pointed to a stagnation in consumer spending.

Bernanke suggested the divergence is in part due to a recovery that has boosted profits more than wages.

Profit share of GDP is unusually high, the share of income going to wage earners is lower than normal, Bernanke said.

The remainder of his testimony was mostly a rehash of recent themes. Bernanke told Congress that it needs to develop a long-term plan to bring down U.S. budget deficits. But at the same time, he says an expected tightening of fiscal policy scheduled for early 2013 could derail the recovery.

Defending the Fed's ultra-easy monetary policy stance, Bernanke credited aggressive unconventional easing for thwarting the possibility of deflation, a downward spiral in prices that can dent economic growth by encouraging both businesses and consumers to hold off on purchases.

The Fed chief pushed back against claims that the potential output of the U.S. economy had been permanently damaged by the financial crisis, which would imply that the central bank has a lot less wiggle room to keep rates at zero than it might think.

If the economy has less room to grow, then stimulative policy is likely to be more inflationary.

We do not see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy, Bernanke said.

But the rampant problem of long-term unemployment raised the risk of a more severe hit to America's potential for growth, he said.

Although we haven't seen much sign of it yet, if that situation persists for much longer, then that will reduce the human capital that is part of our growth process going forward, he said.

Lockhart, of the Atlanta Fed, and Fed Governor Sarah Raskin both said they backed the central bank's highly stimulative zero-rate policy.

Lockhart, a voting member of the U.S. central bank's policy-setting Federal Open Market Committee this year, said he still favors this stance even though at present low rates are not stimulating much credit growth.

Given the circumstances of the economy, which I described earlier as still striving to get its legs, I continue to think the benefits of low-rate policy outweigh the risks, Lockhart told a banking industry conference hosted by the Atlanta Fed.

Raskin deflected worries that Fed policy was punishing savers, arguing that the benefits of low borrowing costs to the economy will ultimately be shared by all.

The Fed's goal, she said, was to strengthen the economic expansion and, over time, return the economy to sustainable rates of output growth, unemployment and inflation.

Ultimately, Raskin said that path would lead to higher returns for stocks, real estate, businesses and retirement accounts, where the bulk of household wealth is held.